MANAGING KYC AND AML RISKS OF CRYPTOCURRENCIES AND DIGITAL ASSETS

R&C: To what extent would you say cryptocurrencies and digital assets have assimilated into the global financial system? How close are they to becoming mainstream transactions, as far as financial institutions (FIs) are concerned?

Parfitt: It is still very early days for cryptocurrencies and digital assets, and their implications for FIs. The combination of different, early-stage technologies and volatile crypto prices makes it a hard market to predict. Bitcoin is down approximately 80 percent from its 2017 highs, initial coin offerings (ICOs) have been plagued with accusations of fraud and a 2017 EY report found that 30 percent of ICOs have lost almost all of their value. Nonetheless, buoyant ICO markets and investments suggest they are here to stay. Regulators too are increasingly focusing their efforts on the virtual currency space, from an anti-money laundering (AML) and countering of terrorist financing (CTF) perspective. The application of blockchain technology by financial firms to solve specific use-cases shows there is real institutional interest and investment. A recent Morgan Stanley report highlighted that over 17 major global banks are using blockchain to underpin a wide range of use-cases, from escrow management to trade finance, Know Your Customer (KYC), private-label mortgage-backed securitisation (MBS) and derivatives trading.